Uneven Optimism Across USMCA Businesses
New study reveals that Mexican executives expect far more growth by the end of 2021 than do Canadians or Americans.
If there is one thing that is clear in reflecting on the past year and a half, it’s that Covid-19 and the pandemic recession created uncertainty and instability for businesses around the world. This reality is well-documented in the results of the USMCA Payment Practices Barometer (PPB) survey released in July by trade credit insurer Atradius.
The report details the experiences and outlooks of businesses throughout the USMCA region—i.e., within the United States, Canada, and Mexico. One of its insights is the drastic difference in optimism felt by executives in the region’s different countries. Most survey respondents in Mexico expect to see an improvement in business performance over the coming months. In Canada, this picture is reversed, with a minority expressing optimism. Executives in the U.S., meanwhile, have a fairly neutral outlook.
The variation in outlook represents a microcosm of what is going on globally as businesses emerge from the pandemic recession. Two months after the report’s publication, the Covid-19 pandemic continues to evolve, with cases rising faster than vaccines are being administered and with new variants of the virus spreading. Still, the USMCA PPB report provides a clear picture of where businesses throughout the region feel they are headed in the last quarter of the year.
Credit Management Costs Soaring
For companies throughout the USMCA region, the cost of managing accounts receivable has risen dramatically in the past year and a half. The biggest jumps in these costs were reported by businesses that manage credit and collections in-house.
The primary cause of the cost increases is likely the growing proportion of sales made on credit. Essentially, extending credit to more customers means companies must devote more resources to credit risk management. On the other hand, the rising credit management costs may also indicate a deteriorating risk environment, because the longer an invoice remains unpaid, the more resources the company must deploy to collect on it. Some companies have begun outsourcing credit management to achieve certainty around costs regardless of what’s happening in the external environment.
The pandemic and resulting supply-chain disruptions around the world have certainly heightened business risk. Many aspects of the external business environment are unpredictable, and the black swan event of the Covid-19 pandemic proved that companies need to take a proactive approach to mitigating the uncertainties inherent in trade. As insolvencies reached an all-time high due to the pandemic, companies with strong credit management processes were better prepared to avoid catastrophe.
Domestic Credit Sales Dominate
Overall, the USMCA region has seen more domestic credit sales than foreign credit sales since the outbreak of Covid-19. Sixty percent of survey respondents prefer extending credit domestically vs. selling on credit to buyers from other countries. This is likely due to the supply-chain challenges brought on by the pandemic, although cross-border trade may pick up by the end of the year.
Although the pandemic lingers and economies continue to face threats related to protracted vaccination progress and new Covid-19 variants, companies in the USMCA region are poised for a steady recovery this year. Additionally, more than a third of USMCA businesses have been giving customers longer to pay and settle invoices over the past year. Our research indicates this was most often the case in the United States, followed by Mexico and then Canada. These results vary from industry to industry: The IT, communications, and electronics industry offered significantly more relaxed payment terms, while both the agri-food and chemicals/pharmaceuticals sectors significantly shortened payment terms during Covid-19.
The pandemic and abnormal supply-chain disruptions of the past 18 months obviously influenced this change in payment terms. The terms offered by the supplier’s own suppliers and the customer company’s credit capacity both impacted changes to payment terms for a given transaction. Survey respondents also mentioned trade credit insurance as an important factor influencing their payment terms. Roughly a third of U.S. businesses reported that insurance allowed them to offer more competitive terms to customers.
Possibly as a result of kinder payment terms, U.S. businesses are grappling with more late payments and writeoffs than their USMCA peers. An average of 41 percent of businesses across the region reported deterioration in customer payment practices over the past year. Much of this is because payment terms have relaxed to ease the burden businesses are feeling during the recession.
An Optimistic Outlook
Across the USMCA region, 59 percent of survey respondents are optimistic that their business’s performance will improve before the end of the year. Still, there is a sizeable country-by-country disparity. Mexican executives are overwhelmingly optimistic, with 81 percent anticipating growth, while only 36 percent of Canadian survey respondents are optimistic about their business prospects in the remainder of 2021. In the United States, the split between those who expect to grow in the second half vs. those who don’t is about 50/50.
Much of the contrast between Canada and Mexico reflects where each country started. While Canada was doing fine economically before the pandemic and businesses received a surplus of federal aid amid the recession, Mexico experienced quite the opposite. Not in a stable place economically at the beginning of 2020, Mexican businesses were hit hard by the pandemic. Government support there was less generous than in the other USMCA countries, as well. These factors combined to depress expectations among Mexican businesses, making any prospect of improvement lead to optimism.
Only time will tell how the pandemic recovery evolves from here, as vaccines continue to be administered to keep up with the discovery of any new Covid-19 variants and as governments pull back on the economic supports that kept many businesses afloat during these trying times. As the world slowly returns to normal, businesses in the USMCA region will continue to assess their risk in new situations and adjust their overall optimism for the future to reflect any new developments that may arise.